Hi everyone,

I’m Melvin, just turned 31 and am a lawyer (no I don’t chase ambulances or litigate!).

Hey Minnie – I’m in Perth too. So you’re not the only sandgroper.

I found this forum by searching google, on one of my internet surfing expeditions to find property investment websites. I like forums, because they are populated by real people with real experiences.

Maximus – that’s an inspiring story. Keep on going mate. I hope that you will find more than enough happiness in the years to come to make up for the pain.

I spent most of my youth punting on the stockmarket, got lucky early and became cocky. Nearly lost my shirt in the tech crash, with enough debt to buy an IP but nothing to show for it. That’s when, with my tail between my legs, I decided that I needed a proper plan.

After years of reading, research, attending seminars, surfing the internet and just asking people, I came to the conclusion that IPs are one of the easiest and strongest foundations when you’re building financial independence.

So, after clawing my way back out of my self-dug financial hole (which took me the better part of 4 years), I finally bought my first property just over a year ago for an absolute bargain price, when the banks still didn’t want to know me. Thanks to a great mate of mine, who’s a mortgage broker, I got into a Liberty home loan which allowed me to borrow 110% of the purchase price – together with the FHOG, I only had to stump up about $1,000 (only thing was the high interest rate []). I lived in it while I renovated it, and the bank recently gave me a great valuation when I was refinancing, which has nearly got me out of the woods! Unfortunately, I made the big mistake of getting too attached to my apartment, and can’t make myself rent it out. It’s just the best apartment now, and I can even take the ferry to work in the mornings, which is a bonus!

I’ve been writing a book on the conveyancing/settlement process for WA, because I couldn’t find anything out there which catered for us out here in the West. It’s basically a condensation of my experiences, both at work and personally when buying my property. It was mainly for fun, and also to help me when I bought my next IP. But it’s starting to look pretty good, so hopefully, I’ll publish it soon, although I’m not sure exactly how and what to do. I sold a few on ebay a while ago, but that was hard work and slow going. I’d welcome any tips or comments, whether on what should go into the book, or how I should go about flogging it off.

Looking to buy my next IP now – hopefully soon. I had a 10 year retirement plan – it’s now reduced to 9 years, and I need to get moving!

I think everyone who posts on this site is great – people who actually care enough to share their experience, knowledge and even secrets in property investing. Unlike many other forums, I haven’t seen anything remotely resembling flaming! It’s a great community.

Cheers
M

Sure, negative gearing means you are actually making a loss. But as others have posted, there are benefits, and it does work for some people.

One thing that nobody seems to have talked about is how you can use negative gearing to “shift” your tax deductions into your own home. For example, if you get a tax refund from your negatively geared property, you plop the entire amount into your home mortgage. This will not only allow you to pay off your home mortgage more quickly, it also allows you to own an investment property with all the upside (and risks too) that come with it.

Willi – that 40-something woman was wrong, it’s possible to have a negatively geared property that is cash flow positive. This is where your rent is more than all your expenses, including interest, but less than your expenses plus the depreciation allowance. This means you will still record a “loss”, entitling you to a tax refund, even though you are getting more cash in rent than you are paying in expenses.

However, you can’t be too greedy when claiming tax deductions on a negatively geared property. Negative gearing essentially relies on the principle that you are running a “business”, namely your investment property, to generate a profit, and expenses incurred are tax deductible. But you need to have a reasonable prospect of actually making a profit in the future. If the ATO decides that you will never generate a profit within a reasonable period, they can disallow your negative-gearing deductions.

Hope this is helpful

Cheers
M

I don’t intend to sound negative, but I think that there is a place for caution and risk management in any investment, especially when prices are running hot and everyone and his dog are getting into the market.

I remember the tech crash in the late 90’s (not least because I nearly lost my shirt in it) – and David is right in that respect – people were crazily buying stocks without doing any research – it was a good buy just because everyone else was buying it, and it was a good price just because everyone else was prepared to pay that much. Foolish me included. I call that lemming behaviour. See what happened.

The funny thing is, I know people who told me that they either didn’t really get affected by the tech crash, or they actually made money in spite of it! In all these cases, they did their research and bought only those stocks which were solid companies with real businesses, and resisted the urge to follow the crowd and pay what they felt was way too much for other stocks. Mind you, it wasn’t necessarily because they thought those other stocks were in dodgy companies – they simply did their research and concluded that the asking price was way above fair value. Others bought options to put a limit on their exposure to loss. And when the crash came, they simply sat tight, weathered the storm, and came out on top!

I think we can learn a bit from these wise investors for property investing. Do your research, make sure that you’re paying a fair price (or below what you think is a fair price), and limit your losses (ie take out landlord’s insurance, building insurance etc). That’s what I try to do. Everytime I think about buying a particular property, I do a historical price-check on that property and other similar properties in the area, to see what the most recent selling price was, and compare that to what the seller is asking for. If it’s way too much, I resist the urge to buy and walk away. Sure, I may be missing out on potential capital growth, but I’m also protecting my backside.

Does anyone else have any other risk-minimisation tips?

Cheers
M

Hi smartmoney,

Sorry if I’m replying twice – my earlier reply didn’t come up for about 10 minutes, and I wasn’t sure if I stuffed it up.

Anyway, Davo70 is right – you need to live in the property within 12 months after settlement.

But the FHOG Act doesn’t require you to live in the property for any minimum period. All you need to do is to prove that it was your principal place of residence (PPOR). Things that help prove this include redirecting all mail to your new address, as well as notifying government agencies about your new address (eg driver’s licence, local council, etc). Obviously, the longer you live in the property, the easier it is to prove that it is indeed your PPOR. If you only live in it for a short period of time, this could technically still be ok (even if it’s a week!) as long as you can prove that the property really is your PPOR (although I think that anything less than a month is pushing it uphill unless you’ve got a really really good reason).

But as Davo70 says, be careful – if you aren’t genuinely going to live in the place as your PPOR, don’t claim the grant. The penalties are way too high if you get caught out. Not only do you have to repay the $7,000, you could be hit with penalties of up to another $7,000. You could also be prosecuted for the criminal offence of misleading the government which carries a maximum fine of $20,000. If that’s not bad enough, the government also has the power to lodge a memorial on your property which overrides all existing encumbrances, including mortgages. This in itself is likely to breach your loan terms with the bank, who will then repossess and sell the property. Like I said, it’s not worth taking the risk, unless you really do intend to live in it as your PPOR.

Why do I know so much about this? I’ve been writing a book (mainly for fun, and also to help with future property purchases) on property conveyancing, which has a chapter dealing with the FHOG. I had to do quite a bit of research on the ins and outs of the FHOG to make sure my chapter was correct, and the above is some of the fruits of my labour!

enjoy!
M

Hello

In WA, the “land rich” threshold is coming down to 60%, because the government needs to find more money to fund their budget blowout.

But I think that the value threshold is still $1 million. That means that Leigh’s idea may work for properties that are cheaper than that.

However, Nessie’s made a really good point about the risk of buying a company – it’s the skeletons in the closet that come out to haunt you later. A friend of mine had a similar probelem. He bought a company which he was assured was “clean”. 3 months later, the ATO came after him, claiming that the company owed over a million bucks in unpaid taxes!! Fortunately, he was able to walk away from the mess because he hadn’t put too much into the company yet.

The way to deal with this problem is to get comprehensive “warranties” from the seller. These warranties are not like the fridge warranty you get when you buy a new fridge. They are basically promises by the seller regarding various things, for example that the company has paid all its taxes, and that it doesn’t owe anybody any money. The idea is that if any of the warranties turn out to be false, you can sue the seller for breach of warranty. However, if the seller doesn’t have the money to compensate you, or if the seller cannot be found, you’re still stuck with the problem!

Cheers
M

Hey AD,

I bought an apartment in South Perth for $120,000 just over a year ago. Lived in it while I renovated it for the last 12 months (I definitely DON’T recommend this to anyone!! I went without a toilet bowl for a week, because the toilet tiler could only make it 3 days after he was meant to come in to do the job) But it all paid off when the bank valued the apartment recently at $175,000. And I spent less than $15,000 all up.

It’s my best deal because I’ve proved to myself that it actually works!

Cheers
M

Hi Harry,

I found myself in a worse situation to yours. Had a good job, but absolutely zero cash in the bank and lots of debt, including a car loan that was more than what my car was worth!!

Thanks to my mortgage broker mate, I went and borrowed money from one of those “Non-conforming” lenders, because none of the banks wanted to know me. They were great. They lent me 110% of the purchase price, which, together with the FHOG, allowed me to pay for my IP (which I’ve lived in to renovate, and still haven’t moved out yet!), and didn’t charge any mortgage insurance.

Of course, nothing is for free, and there was a price to pay – interest at 8.5%, an up-front fee of 1% of the loan (which was still cheaper than mortgage insurance) no option for a fixed rate, and I had to pay off 15% of the loan on a 5 year term (the remaining 95% was a normal 25 year term). This meant a bit more pain in the beginning, with larger than normal mortgage payments.

But the benefit of it all is that I got to buy a property and renovate it, when it would otherwise have been impossible for me to do so. I’ve recently refinanced my loan with one of the big banks on a much lower interest rate, and can breathe a sigh of relief.

This might not necessarily be the method for you, but I just wanted you to know that it isn’t impossible to get a place of your own now, although there may be a price to pay for it.

Cheers
M

Hi getting there,

I think wilandel is right.

I know that in WA, there’s a concessional stamp duty rate that applies if you’re buying a PPOR for $185,000 or less. And if you’re buying your first home, you also get an additional $500 rebate (this is separate from the FHOG).

Sohuld be worth checking if there’s anything like this in the State you live in. If you want to have a look at the relevant stamp duty act, check out austlii.edu.au

Cheers
M